NCLT Kolkata: Provisional Attachment Order Under PMLA Won't Bar Admission Of CIRP Against Corporate Debtor Under IBC

Background Facts:

The State Bank of India ('Applicant') commenced CIRP proceedings against Shree Mahalaxmi Corporation Pvt. Ltd. (Corporate Debtor) under Section 7 of IBC. The total debt amount involved is Rs. 563.44 crores, with the loan account having defaulted on 29.12.2012.

One of the contentions of the Corporate Debtor is that even if it undergoes CIRP, resolution might be unattainable due to all its assets being under the jurisdiction of the enforcement directorate operating under the Prevention of Money Laundering Act ('PMLA').

NCLT Verdict:

The NCLT Kolkata allowed the CIRP application and held that the Provisional Attachment Order under PMLA will not bar the admission of insolvency proceedings against the Corporate Debtor under IBC.

The Tribunal, drawing from the NCLAT's ruling in Kiran Shah, RP of KSL and Industries Ltd vs. Enforcement Directorate, and the Delhi High Court's decision in Deputy Director of Enforcement, Delhi vs Axis Bank & Ors., highlighted the clear distinction between the IBC and PMLA.

It observed that PMLA, enacted by the government, focuses on confiscation of the 'Proceeds of Crime' by the government not in capacity as a creditor. It serves the purpose of preventing individuals involved in criminal activities from converting illicit proceeds into legitimate assets, thereby evading civil liabilities owed to creditors. The essence of PMLA lies in preventing individuals from benefiting from criminal proceeds to discharge their civil liabilities, as such assets do not rightfully belong to them.

In contrast, the IBC aims to consolidate and amend the laws relating to reorganization and to facilitate the resolution of corporate insolvency in a time-bound manner, safeguarding the interests of stakeholders while promoting entrepreneurship and ensuring the maximization of asset value and availability of credit.

NCLT emphasized the principles laid down in the Delhi High Court's decision of Rajiv Chakraborty Resolution Professional of EIEL vs. Directorate of Enforcement to culminate the tussle between PMLA and IBC as under:

a. As per the provisions of PMLA, it is evident that if a legitimate third party had obtained ownership of a property prior to any criminal activity leading to suspicions of it being proceeds of crime, such acquisition cannot reasonably be seen as an attempt to circumvent or undermine the law.

b. PMLA does not place the corporate debtor or the Resolution Professional in a situation where they have no choice but to accept the consequences.

c. The statutes offer sufficient avenues for addressing claims and grievances.

d. Resolution Professionals are permitted to seek relief from competent authorities under PMLA concerning properties tainted by criminal activity, within the bounds of the law.

e. An interim attachment order issued by the Enforcement Directorate under PMLA does not grant the authority any superior or overriding rights to the property in question.

f. The resolution of disputes regarding attached properties and the determination of distribution priorities must be handled independently and in compliance with legal procedures.

The Tribunal also placed reference to its ruling in State Bank of India v. R.P. Info Systems Ltd. identical to the present instance wherein the Financial Creditor extended the loan based on the time value of money, and the Corporate Debtor defaulted on the repayment. The defaulted amount exceeded the threshold limit of Rs. 1 Crore under Section 4 of the IBC and the application was held to be comprehensive and filed within the stipulated time frame.

In conclusion, NCLT allowed the CIRP application against the Corporate Debtor under Section 7 of IBC.

Case Title: State Bank of India vs. Shree Mahalaxmi Corporation Pvt. Ltd.

Case No.: Company Petition (IB) No. 130/KB/2022

Counsel for Financial Creditor: Mr. Mainak Bose, Adv. Mr. Santosh Kumar Ray, Adv. Ms. Zeba Khan, Adv. Ms. Muskan Saha, Adv.

Counsel for Corporate Debtor: Mr. Joy Saha, Sr. Adv. Ms. Urmila Chakraborty, Adv. Mr. Snehasish Chakraborty, Adv.

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